ISAs: Enjoying the Capital Gains Tax Advantages

One of the biggest advantages to opening an investment ISA is the fact that you avoid paying capital gains tax on any profits you make from selling your shares. This potential benefit leads many people to explore their options in stocks and shares ISAs, and here we explain capital gains tax in greater detail, helping you develop a clear picture of how an ISA can benefit you in this area.

What is capital gains tax?

Simply put, capital gains tax (or CGT) is paid on money that you make, from certain sources, throughout the tax year. It only applies to the sale of items that have increased in value, and is only applicable on gains over a certain amount. Moreover, capital gains tax is not applied to the following:

  • Your house (as long as it's your primary residence)
  • Your car
  • UK government bonds
  • Lottery winnings
  • Money that's accounted for as income (i.e. salary)
  • Money that you make on personal belongings amounting to less than £6,000
  • Money made from ISAs

How is capital gains tax determined?

Capital gains tax is determined using the following criteria:

  • The amount of money received after selling an asset
  • Costs that reduced the amount you earned
  • Losses on assets
  • The annual exemption limit

The calculation process is explained in more detail on the tax form which is provided for capital gains reporting. If you have any questions about your capital gains tax, it's best to talk to a qualified tax advisor.

Can I reduce my capital gains obligation?

In some cases, losses taken during the tax year can be used to offset capital gains tax for that year. However, losses on ISA investments cannot be used for this purpose because you're not paying capital gains tax on the money you earn from an ISA.

How much can I save on capital gains tax by using my ISA allowance?

The capital gains tax benefit varies from individual to individual, as well as from year to year. For example, if you pay the current basic rate of capital gains tax, at 18%, this means that for every £100 of capital gains earned in a non-ISA investment, you will have to pay £18 in tax. Therefore, the more you earn on your ISA, the greater the savings becomes. The potential to make substantial savings on capital gains tax is one of the biggest attractions of opening a stocks and shares ISA. As with all investment vehicles, it's best to consult your tax advisor and/or seek independent financial advice if you have additional questions about the tax benefits of an ISA.

One of the biggest advantages to opening an investment ISA is the fact that you avoid paying capital gains tax on any profits you make from selling your shares. This potential benefit leads many people to explore their options in stocks and shares ISAs, and here we explain capital gains tax in greater detail, helping you develop a clear picture of how an ISA can benefit you in this area.

 

Important Risk Information:

This website contains information only and does not constitute advice or a personal recommendation in any way whatsoever. The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. The tax efficiency of ISAs is based on current tax law and there is no guarantee that tax rules will stay the same in the future.

Different types of investment carry different levels of risk and may not be suitable for all investors. Please ensure that you read the Important Risk Information for further details. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the product literature. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

www.isa.co.uk is a trading name of Fair Investment Company Ltd which is authorised and regulated by the Financial Conduct Authority.